Can the Texas homestead exemption be set aside if the debtor made a misrepresentation?

In a case that is an unfortunate reflection of the times, the Texas Supreme Court will be asked to decide whether the Texas Constitution’s homestead exemption has an unwritten exception if the debtor has misrepresented whether the property is being used as a residence.

Background

The debtor in Villareal had lost their house to foreclosure in 2005. Subsequently, and quietly, the family moved into a structure on a piece of restaurant property that they also owned. In 2007, the debtor agreed to a lien against the restaurant property. That loan did not turn out well, and that lender tried to enforce the lien. The debtor, in turn, invoked the Texas homestead exemption.

The creditor contended — and the lower court found — that the debtor had made a series of representations that this was in fact not their residence. Accordingly, the lower court found that the homestead exemption could be set aside.

The Fifth Circuit upheld the lower court’s view of all the contested facts. The way the Fifth Circuit framed the question in its certification order relies on those facts:

Whether an otherwise valid homestead exemption claim against seizure and sale by creditors is foreclosed by equitable estoppel when (1) claimants’ use of the property as a homestead was surreptitious; (2) the claimants publicly declared at the time that the lien was placed on the property that no such use of the property was being made; and (3) the other criteria for equitable estoppel have been met, viz., (a) that a false representation was made with either actual or constructive knowledge of the truth; (b) to a party without knowledge of the truth or without the means of knowing the truth; (c) with the intention that the false representation or concealment should be acted on; and (d) the party to whom it was made actually relied on or acted on it to his prejudice.

The shorter way to say that is, “Is there an equitable-estoppel to the Texas homestead exemption?”

What led to the certified question

The Fifth Circuit notes two strains of authority in Texas law — some saying there is no exemption, and others suggesting that there is. The opinion noted that, in some of these cases, the Texas Supreme Court had merely stated the principle without actually applying it to facts (that it might have been dicta).

Assuming the Texas Supreme Court accepts this certified question (which seems likely), it will have to grapple with those two lines of authority — and another, perhaps more subtle problem under Texas law.

Unlike other areas of commercial law where the Court might have a freer hand in deciding the relative equities, the Texas homestead exemption is a creature of the Texas Constitution. It may read like a detailed commercial statute, but it is actually beyond legislative reach. It can be amended only by putting a proposition to Texas voters.

It will be interesting to see how the Texas Supreme Court addresses equitable estoppel (a classic common-law doctrine) as a possible limitation on the constitutional homestead exemption.